The buyer's draft purchase agreement demands an indemnity escrow of fifteen percent of enterprise value with a two-year survival period. How do we negotiate the use of Buy-Side Representation and Warranty Insurance to eliminate this escrow?

Question

Tyler Smith · Accepted Answer

An indemnity escrow tied up for eighteen to twenty-four months locks away significant proceeds from your sale. It creates lingering post-close disputes over operational disclosures, customer representations, and compliance warranties. The most effective way to eliminate this holdback is to require the buyer to procure Buy-Side Representation and Warranty Insurance (RWI).

RWI shifts the financial liability for breaches of general representations and warranties from the seller to an institutional insurance carrier. Instead of you placing ten to fifteen percent of the purchase price into an escrow account, the buyer secures a policy that acts as their sole recourse for breaches.

To successfully execute this strategy during the transaction:
- Counter the buyer's initial indemnity draft by capping seller liability for non-fundamental representations at the retention deductible of the RWI policy, which is typically zero point five to one percent of enterprise value.
- Agree to share the cost of the policy premium and underwriting fee equally between buyer and seller. The combined expense of an RWI policy is minor compared to having millions of dollars frozen in a commercial bank escrow.
- Require the buyer to waive all subrogation rights against the seller in the definitive purchase agreement, except in cases of actual deliberate fraud.
- Maintain a completely clean and transparent virtual data room. RWI underwriters will exclude known issues or poorly documented liabilities from coverage, so every disclosure schedule must be exhaustive and accurate.

By replacing an indemnity escrow with an insured policy, you maximize cash at close, establish a definitive clean break from historical liabilities, and avoid post-closing negotiations over escrow releases.